Buy Eternal Ltd for the Target Rs.330 by Emkay Global Financial Services Ltd
Robust 1Q show; more growth ahead
Eternal registered strong 1Q results, with Blinkit reporting 140% YoY GOV growth and 50bps QoQ improvement in adj EBITDA margin. Over the next 2-3 quarters, Eternal is set to gradually make a transition in the quick commerce (QCom) business, from its current marketplace model to an inventory ownership model; this will drive ~100bps margin expansion, albeit require net working capital of ~18 days. The management sees enough room for storecount expansion in all cities, to 3,000 stores from the 1,544 currently. Food delivery GOV grew 16% YoY, and the management expects FY26 GOV growth at 15-20%. We believe QCom has a long growth runway and Blinkit is seen capitalizing well on this. As QCom is currently in the ‘landgrab’ phase, we believe EBITDA breakeven for Blinkit is still some time away. Food delivery is likely to remain a cash cow for the company, and we expect the business to see 20%+ EBITDA CAGR over the long term. We retain BUY on the stock while revising up our TP (DCF-based) by ~14% to Rs330 (from Rs290 earlier).
Excellent execution on the QCom front
Eternal’s QCom business reported a 140% YoY growth in GOV (Rs118bn), surpassing food delivery GOV (Rs108bn, up 16% QoQ) for the first time. The management indicated strong growth momentum even in the cities where the company has good geographical coverage. We believe that QCom has a long growth runway, in tier-2 cities too; this gives visibility to the management to expand to 3,000 stores. As Eternal has become an IndianOwned-and-Controlled-Company (IOCC), it will make a transition in its QCom business, from a marketplace model to inventory ownership over the next 2-3 quarters. The management expects ~100bps margin expansion over time, as it can start working with brands directly and have more control on inventory. This will result in QCom revenue converging with the NOV, Hyperpure revenue decreasing on account of scale down of the non-restaurant business, net working capital (NWC) in QCom increasing, and NWC in the Hyperpure business decreasing.
Food delivery the cash cow now; District has long-term potential
Food delivery posted 16% GOV growth, while adj EBITDA grew 44% YoY to Rs4.51bn. As adj EBITDA margin has already reached 5.0% of NOV, we expect it to grow in line with revenue. The mgmt sees food delivery revenue growing 15%+ in FY26 and trending toward 20% in FY27. As market expansion is steady, we expect revenue and EBITDA growth to log at ~15% for this business. The mgmt has decided to follow the model of Rotational Leadership, wherein it appoints a CEO for a fixed tenure of 2 years. The objective of this form of operational model is to ensure continued activity and innovation in the system. Eternal has appointed Aditya Mangla as CEO of the food delivery business. The going-out (District) business is growing at 30%+, with average MTU of ~2mn. While the business is clocking strong unit economics, it is currently at a nascent stage.
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